Robust risk management is the core function of every central counterparty
and a cornerstone of the efficiency of financial markets


The derivative markets of the exchange are deriving great benefits from much improved risk management practices that the JSE has introduced over recent years, according to Terence Saayman, Head of Risk in the JSE’s Post-Trade Services division.

JSE Clear, a wholly-owned subsidiary of the JSE, is the central counterparty (CCP) that clears all trades executed on the JSE’s derivative markets. In a CCP, trades are netted to increase efficiency. Net payments are made to and from the CCP by clearing members who guarantee the positions of the market participants for whom they clear.

An important function of the CCP is to independently value and risk-manage these positions on a daily basis throughout the life of a trade. ‘Our work in the field of developing world-class risk-management practices has brought down the overall cost of trading, as lower capital charges may be applied by banks to trades cleared and settled through JSE Clear.

‘This is due to JSE Clear’s sophisticated risk-management framework, particularly as it pertains to the management of counterparty credit risk – the risk of a loss due to counterparties not living up to their contractual obligations.

‘In 2016, JSE Clear was deemed equivalent to its EU counterparts by the European Securities Market Authority, resulting in international credibility. This would not have been possible without a world-class risk-management framework in place,’ according to Saayman.

The right balance-PQ1

‘At JSE Clear, we have a clearly defined risk-tolerance statement supported by various tools and processes; established robust position monitoring processes and conduct; and daily credit and liquidity stress testing. We have ensured sufficient pre-funded resources are in place in case of a participant default, including a default fund to which the JSE and clearing members contribute.

‘We have also established lines of liquidity for the clearing house and continually review the appropriateness of the instruments that we clear. We are constantly increasing the scope and quality of risk-management services to make the derivatives market as safe as possible for all participants.’

Saayman adds that mitigating concentration risk is another key role of a CCP. JSE Clear has implemented a framework calling for a higher level of initial margin from portfolios presenting large and concentrated exposures to cover these additional risks.

While this higher margin requirement affects only a small number of participants, the whole market benefits from implementing this precaution.

JSE Clear’s system of financial safeguards is continually evaluated and updated to reflect the most advanced risk-management techniques. Ensuring appropriate, sophisticated risk measurement methodologies is a key focus area.

For instance, the JSE actively seeks opportunities to optimise the amount of margin posted while appropriately covering the risk posed by each market participant. A recent example of this is the implementation of a revised margining methodology for swap futures portfolios, which benefits the market with greatly reduced margin requirements.

The JSE is currently implementing a clearing technology system that will enable participants to view and assess their risk exposures and margin requirements on a real-time basis.

The Integrated Trading and Clearing (ITaC) project is one of the largest projects that the JSE has embarked on, and it will enable more proactive and robust management of risks.

For more information regarding financial risk management of the JSE’s markets, please contact [email protected].

By Louise Brougham-Cook
Image: Gallo/Getty Images